<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 23, 1998
REGISTRATION NO. 333-33187
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2 TO FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
________________
PREMIUM RESTAURANT COMPANY
(FORMERLY KNOWN AS CIATTI'S, INC.)
(Exact name of registrant as specified in its charter)
________________
MINNESOTA 41-1564262
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
________________
5555 West 78th Street
Edina, Minnesota 55439-2702
(612) 941-0108
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
________________
Phillip R. Danford Copies to:
President and Director Thomas G. Lovett IV
Premium Restaurant Company Kristin L. Johnson
5555 West 78th Street Lindquist & Vennum P.L.L.P.
Edina, Minnesota 55439-2702 4200 IDS Center
(612) 941-0108 80 South Eighth Street
(Name, address, including zip code, Minneapolis, Minnesota 55402
and telephone number, including area (612) 371-3211
code, of agent for service)
________________
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on the Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: /X/
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box: /X/
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration number of the earlier effective registration
statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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Title of Each Class Proposed Maximum Proposed Maximum
of Securities to Amount to be Offering Aggregate Amount of
be Registered Registered Price Per Unit Offering Price Registration Fee
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<S> <C> <C> <C> <C>
Units consisting of one share of Common Stock 2,000,000 $1.25 $2,500,000 $847
and a Warrant to purchase an additional share
of Common Stock
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Common Stock Underlying Warrants 2,000,000 $1.875 $3,750,000 $1,271
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Total $2,118(1)
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</TABLE>
(1) $6,590 was paid with the original filing on Form S-2.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE>
PRELIMINARY PROSPECTUS
Subject to Completion
2,000,000 UNITS
EACH UNIT CONSISTING OF ONE SHARE
OF COMMON STOCK AND ONE REDEEMABLE
COMMON STOCK PURCHASE WARRANT
PRICE PER UNIT - $1.25
MINIMUM OFFERING
$600,000 (480,000 UNITS)
__________________________________
PREMIUM RESTAURANT COMPANY
__________________________________
The units offered hereby are being sold by Premium Restaurant Company (the
"Company"), formerly known as Ciatti's, Inc. Each unit ("Unit") consists of one
share of the Company's common stock, $.01 par value per share ("Common Stock"),
and one Redeemable Common Stock Purchase Warrant ("Warrant"). The Common Stock
and Warrants are immediately detachable and separately transferable. One
Warrant entitles the holder to purchase, at any time up to March 31, 2000, one
share of Common Stock at a price of $1.875. Beginning January 1, 1999, the
Warrants are redeemable, in whole, by the Company at a redemption price of $.05
per Warrant on not less than 30 days written notice, provided that the market
price of the Common Stock exceeds $3.50 per share (subject to adjustment) for
any 20 consecutive trading days within 15 days prior to such notice. Holders of
Warrants may exercise their rights until the close of business on the date fixed
for redemption, unless extended by the Company. See "Description of Securities
and Terms of Offering."
Prior to this Offering, there has been no public market for the Units and
no assurance can be given that any such market will exist or develop upon
completion of this Offering or, if developed, will be maintained.
These Units are being sold by the Company's officers and directors.
Until the Company has received commitments to purchase 480,000 Units
($600,000), all proceeds will be placed in an Escrow Account at Norwest Bank
Minnesota, N.A. If the minimum number of Units is not sold by June 30, 1998,
then all proceeds will be returned to subscribers with interest, less any
escrow fees.
THE UNITS OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
COMMENCING ON PAGE 5.
___________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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Underwriting
Price to Commissions and Proceeds to
Public Discount Company
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<S> <C> <C> <C>
Per Unit $1.25 0.0% $1.25
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Minimum 480,000 Units 0.0% $600,000 (1)
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Maximum 2,000,000 Units 0.0% $2,500,000 (1)
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</TABLE>
(1) Before deducting estimated offering expenses of $35,000.
The date of this Prospectus is____________, 1998.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these Securities has been filed with the
Securities and Exchange Commission. These Securities may not be sold nor may
offers to buy be accepted prior to the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy, nor shall there be any sales of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
<PAGE>
[Pictures of Bruegger's Bagel Bakery]
Premium Restaurant Company, through its wholly-owned subsidiary DFW
Bagels, Inc., owns and operates seven Bruegger's Bagel Bakery restaurants in
the Dallas-Fort Worth area.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS AND BY THE INFORMATION AND
FINANCIAL STATEMENTS APPEARING IN THE DOCUMENTS INCORPORATED BY REFERENCE
HEREIN. SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD
BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE UNITS OFFERED HEREBY. TERMS
NOT DEFINED IN THIS SUMMARY ARE DEFINED ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
The Company owns and operates five full-service restaurants in Minnesota
and Wisconsin and seven "Bruegger's Bagel Bakery" restaurants in the
Dallas-Fort Worth, Texas area. Included in these full-service restaurants
are four Italian restaurants operating in Minnesota under the name "Ciatti's
Italian Restaurant-Registered Trademark-" and one steakhouse restaurant
operating in Wisconsin under the name "Spurs Steakhouse & Saloon-Registered
Trademark-." All bagel bakeries are operated under the name "Bruegger's
Bagel Bakery" pursuant to the terms of a development agreement and related
franchise documents under which the Company's subsidiary DFW Bagels, Inc.
("DFW") acts as franchisee.
The Company is conducting this Offering to raise working capital while the
Company is expanding the number of Bruegger's Bagel Bakery restaurants owned and
operated by DFW in the Dallas-Fort Worth area. Under the Development Agreement,
as amended, DFW must have nine Bruegger's Bagel Bakery restaurants open by July
1, 1998 and thirty Bruegger's Bagel Bakery restaurants open by July 1, 2002.
Premium Restaurant Company and its wholly-owned subsidiary, DFW Bagels,
Inc., are Minnesota corporations. The Company's principal office and mailing
address is Premium Restaurant Company, 5555 West 78th Street, Edina, Minnesota
55439-2702 and its telephone number is (612) 941-0108. Unless the context
otherwise requires, references to the Company include the Company and its
wholly-owned subsidiary, DFW Bagels, Inc. References to the Company's
development and operation of its Bruegger's Bagel Bakery restaurants will
generally mean DFW Bagels, Inc. Prior to November 1997, the Company was known
as Ciatti's, Inc. In November 1997, the Company changed its name to Premium
Restaurant Company to reflect the broader business operations of the Company.
During the period September through November 1997 the Company sold five of its
full-service restaurants to raise additional working capital to enable it to
focus on the development of its Bruegger's Bagel Bakery restaurants. See
"Business - Restaurant Demographics."
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Securities Offered.......... 2,000,000 Units. Each Unit offered hereby
consists of one share of Common Stock and one
Redeemable Common Stock Purchase Warrant. Each
Warrant entitles the holder to purchase, at any
time during the period ending March 31, 2000, one
share of Common Stock at a price of $1.875,
subject to adjustment in certain circumstances.
Beginning January 1, 1999, the Warrants are
redeemable, in whole, by the Company at a
redemption price of $.05 per Warrant on not less
than 30 days written notice, provided that the
market price of the Common Stock exceeds $3.50 per
share (subject to adjustment) for any 20
consecutive trading days within 15 days prior to
such notice. Holders of Warrants may exercise
their rights until the close of business on the
date fixed for redemption, unless extended by the
Company. See "Description of Securities and Terms
of Offering."
Common Stock Outstanding
Before the Offering....... 742,819 shares of Common Stock at February 2, 1998.
3
<PAGE>
Use of Proceeds............. Repayment of subordinated debt, accounts payable,
bakery pre-opening expenses, commissary pre-opening
expenses, inventory and supplies, and working
capital. See "Use of Proceeds."
</TABLE>
________________________________________
"BRUEGGER'S" and "BRUEGGER'S BAGEL BAKERY" are trademarks of Bruegger's
Corporation. "CIATTI'S ITALIAN RESTAURANT" and "SPURS STEAKHOUSE & SALOON" are
registered trademarks of the Company.
The Common Stock and Warrants included in the Units offered hereby are
securities of Premium Restaurant Company. They are not direct or indirect
interests in DFW Bagels, Inc. Neither Bruegger's Corporation, nor any of its
affiliates have endorsed, approved or reviewed, or are in any way a party to,
this Prospectus or any of the disclosures contained in this Prospectus.
________________________________________
THIS PROSPECTUS, INCLUDING THE INFORMATION INCORPORATED BY REFERENCE
HEREIN, CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A
OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934. ACTUAL RESULTS COULD DIFFER SIGNIFICANTLY FROM THOSE PROJECTED OR
CONTEMPLATED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT, IN PART, OF THE
RISK FACTORS SET FORTH ELSEWHERE IN THIS PROSPECTUS. IN CONNECTION WITH THE
FORWARD-LOOKING STATEMENTS WHICH APPEAR IN THESE DISCLOSURES, PROSPECTIVE
PURCHASERS OF THE COMPANY'S COMMON STOCK OFFERED HEREBY SHOULD CAREFULLY
REVIEW ALL OF SUCH RISK FACTORS.
4
<PAGE>
RISK FACTORS
INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING MATTERS IN CONNECTION
WITH AN INVESTMENT IN THE UNITS IN ADDITION TO THE OTHER INFORMATION
CONTAINED OR INCORPORATED BY REFERENCE IN THE PROSPECTUS. INFORMATION
CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS CONTAINS
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995, WHICH CAN BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "EXPECT," "ANTICIPATE,"
"ESTIMATE" OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON
OR COMPARABLE TERMINOLOGY. THE FOLLOWING MATTERS CONSTITUTE CAUTIONARY
STATEMENTS IDENTIFYING IMPORTANT FACTORS WITH RESPECT TO SUCH FORWARD-LOOKING
STATEMENTS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES, THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING
STATEMENTS.
RECENT AND ANTICIPATED LOSSES
During the fiscal years ended June 30, 1996 and June 29, 1997 and the
twenty-six weeks ended December 28, 1997, the Company incurred losses of
approximately $1,363,000 and $2,569,000 and 640,000, respectively. The loss for
the twenty-six weeks ended December 28, 1997 is net of a gain of approximately
$926,000 recognized on the sale of five full-service restaurants. Although the
Company believes it can regain profitability through its expansion of Bruegger's
Bagel Bakery restaurants in the Dallas-Fort Worth area, the Company expects that
it will continue to incur losses until profitability is achieved. There can be
no assurance that the Company will be able to achieve profitability of its
Bruegger's Bagel Bakery restaurants.
DEPENDENCE UPON BRUEGGER'S BAGEL BAKERY RESTAURANTS FOR FUTURE GROWTH
Substantially all of the Company sales in the past have been generated from
the operation of its full-service restaurants. The Company currently operates
seven bagel bakeries. The retail bagel segment is an emerging concept, the
long-term appeal and potential of which have not yet been fully determined.
Future growth in sales and profits will depend to a substantial extent on the
Company's ability to increase the number of its bagel bakeries. The Company's
ability to successfully expand its bagel bakery operations will depend upon a
number of factors, including the availability and cost of suitable locations,
the hiring, training and retention of skilled restaurant management and
personnel, the ability of the Company to generate funds from operations, obtain
adequate restaurant financing on favorable terms or to obtain cash concessions
from landlords, the competitive environment, and the ability to obtain the
necessary governmental permits and approvals. There can be no assurance that
the Company will be able to open new bagel bakeries and, if opened, that those
restaurants can be operated profitably or that the opening of any new locations
will not result in reduced sales at existing bagel bakeries. See "Business -
Restaurant and Bakery Operations" and "Business - Restaurant Development."
SALE OF CERTAIN OF ITS CIATTI'S ITALIAN RESTAURANTS
The Company sold three of its full-service restaurants in September
1997, one of its full-service restaurants in October 1997 and one of its
full-service restaurants in November 1997. The three restaurants sold in
September 1997 are located in Burnsville, Falcon Heights and Woodbury,
Minnesota. The restaurant sold in October 1997 is located in St. Cloud,
Minnesota, and the restaurant sold in November 1997 is located in LaCrosse,
Wisconsin. The sale of these restaurants generated proceeds of approximately
$1,827,000. The gain recognized on the sale of the three restaurants sold in
the first quarter of fiscal 1998 was approximately $486,000 and the gain
recognized on the sale of the two restaurants sold in the second quarter of
fiscal 1998 was approximately $440,000. The restaurants sold are initially
being operated as Ciatti's Italian Restaurants, however, the new operators
have the right to change the name. The Company decided to sell these
restaurants to focus on achieving and maintaining profitability at its
remaining full-service restaurants and to generate cash to continue to expand
its bagel bakery concept in the Dallas-Fort Worth market. During fiscal 1997,
the restaurants sold generated approximately $8,270,000 of sales, net
earnings of $445,000 and cash flows from operations of $799,000. The Company
will not have the benefit of this cash flow in the future. Although the
Company has no agreements to sell any of its remaining full-service
restaurants, it is exploring alternatives to maximize its cash flow,
including the possible sale of any of its remaining full-service restaurants
as well as sale and lease-back opportunities.
5
<PAGE>
DEPENDENCE UPON BRUEGGER'S
The Development of the Dallas-Fort Worth area for bagel bakeries by DFW is
subject to the terms and conditions of a Development Agreement and related
franchise agreements with Bruegger's Franchise Corporation ("Bruegger's). Under
the terms of the Development Agreement as amended in November 1997, DFW is
required to comply with a number of requirements with respect to construction
and maintenance of bagel bakeries. DFW is required to have nine Bruegger's
Bagel Bakery restaurants open by July 1, 1998 and thirty bagel bakeries open by
July 1, 2002. The Development Agreement provides that DFW and Bruegger's will
enter into a pre-agreed-upon franchise agreement for each bagel bakery opened by
DFW. The franchise agreement grants DFW the right to establish and operate a
bagel bakery and to use the Bruegger's system and various trademarks. The bagel
bakeries must conform to Bruegger's methods, such as its core products, decor,
fixtures, furnishings and maintenance. Under the franchise agreement, DFW is
obligated to pay fees to Bruegger's, including, but not limited to, a $20,000
franchise fee upon the opening of each bagel bakery. Bruegger's has agreed to
waive the initial franchise fee for any Bruegger's Bagel Bakery restaurants
opened in calendar 1998. In the event the Company fails to comply with certain
terms of the Development Agreement or of the franchise agreement with respect to
a specific bakers, Bruegger's has the right to terminate the applicable
agreement.
During the period from June 1996 through October 1997, Bruegger's was owned
by Quality Dining, Inc. During that period, the Company and Quality Dining,
Inc. became engaged in litigation over the Company's right to sell securities
which resulted in a settlement agreement dated as of April 23, 1997 (the
"Settlement Agreement"). Under the terms of the Settlement Agreement, the
Company and DFW agreed to enter into certain indemnification and license
arrangements with Bruegger's. The parties also agreed that Bruegger's would
have no right of first refusal to purchase securities of Premium Restaurant
Company so long as Premium Restaurant Company remained a publicly-held
corporation and that Bruegger's would have no right of consent for certain
issuances of securities by Premium Restaurant Company (i) if the issuance does
not result in the acquisition of over 40% of the voting power of any class of
securities of Premium Restaurant Company after the completion of the issuance by
any shareholder (other than Phillip R. Danford or L.E. "Dan" Danford, Jr.) who
previously held less than 40% of the voting power of such securities and (ii)
such issuance does not result in Phillip R. Danford and L.E. "Dan" Danford, Jr.
collectively owning less than 10% of the voting power of all classes of
securities of Premium Restaurant Company. The Development Agreement, as amended
by the Settlement Agreement, and subsequently amended in November 1997, is
herein referred to as the "Development Agreement."
GUARANTEE OF SUBSIDIARY'S LEASES BY PREMIUM RESTAURANT COMPANY
Although the Company's wholly-owned subsidiary, DFW Bagels, Inc., is the
developer and operator of the Company's bagel bakeries, Premium Restaurant
Company has guaranteed certain of the leases entered into by DFW and may
guarantee additional leases in the future. If DFW were to default on these
leases, and the assets of DFW were otherwise insufficient to satisfy these
obligations, the landlords would have a claim against Premium Restaurant Company
and its assets.
THE COMPETITIVE RESTAURANT AND FOOD SERVICE INDUSTRY
The restaurant and food service industry is highly competitive and
fragmented. There are numerous restaurants and other food service operations
that compete directly and indirectly with the Company. Many of these
entities have significantly greater financial resources and higher total
sales volume than does the Company. The restaurant business is often
affected by changes in consumer taste and discretionary spending priorities,
national, regional and/or local economic conditions, demographic trends,
consumer confidence in the economy, traffic patterns, weather conditions,
employee availability, and the type, number and location of competing
restaurants. Any change in these factors could adversely affect the Company.
In addition, factors such as inflation and increased food, labor and other
employee compensation costs could adversely affect the Company. In the
Dallas-Fort Worth area, the Company expects to encounter competition from
Einstein Bagels, as well as a number of local, owner-operated bagel shops
that in many cases have developed a loyal local clientele. See "Business."
6
<PAGE>
NEED FOR ADDITIONAL CAPITAL
Under the Company's Development Agreement with Bruegger's, it is required
to open a total of thirty bagel bakeries prior to July 1, 2002. The Company
estimates that it will cost approximately $370,000 for the capital expenditures
and initial franchise fee for each location. In addition, the Company estimates
it will cost approximately $500,000 for the construction of a commissary, which
the Company plans to build in calendar 1998. Accordingly, the Company will need
funds in addition to those raised by this Offering to support its expansion
plans and comply with the terms of its Development Agreement with Bruegger's.
There can be no assurance that the Company will be able to obtain such
additional financing.
BORROWING FROM AFFILIATES
In order to finance certain working capital requirements, the Company has
borrowed $400,000 from L.E. "Dan" Danford, Jr., the Chairman of the Board of
Directors of the Company, pursuant to an unsecured 10.5% Promissory Note due
December 31, 1998. The Company anticipates that it may be necessary for it to
borrow additional funds from Mr. Danford in the future. There are, however, no
guarantees that funds will be available from Mr. Danford when needed by the
Company.
INCREASES IN FOOD COSTS
The Company's profitability is dependent on its ability to anticipate and
react to changes in food costs. Various factors beyond the Company's control,
including climatic changes, may affect food costs. While in the past management
has been able to anticipate and react to increasing food costs through
purchasing practices and price adjustments, there can be no assurance that it
will be able to do so in the future.
NEED TO ESTABLISH MARKET PENETRATION IN DALLAS-FORT WORTH, TEXAS AREA
Experience obtained from industry sources demonstrates that the
profitability of any individual bagel bakery often depends to a high degree on
the penetration of a particular market by the bagel bakery operator. The
Company assumes that individual bagel bakeries will typically become profitable
only after the Company has opened a number of bagel bakeries sufficient to make
the franchise name well-known in that market. The Company estimates that in the
Dallas-Fort Worth area the minimal number of bagel bakeries needed for such
penetration is between twelve and twenty.
CONTROL BY DIRECTORS, EXECUTIVE OFFICERS AND AFFILIATES
The Company's directors, executive officers and members of their families
currently beneficially own 59.6% of the Company's outstanding Common Stock. As
a result, these shareholders currently exercise and are expected to continue to
exercise influence and, if acting together, control all matters requiring
approval by the shareholders of the Company, including the election of
directors, approval of amendments to the Company's Articles of Incorporation and
approval of mergers or other business combination transactions. Such control by
existing shareholders could have the effect of delaying, deferring or preventing
a change in control of the Company.
LOCAL FOOD TASTES
The bagel concept has become successful in many parts of the United States,
but is new in the southern portion of the country. Although the Company
believes that bagels can be successfully introduced to the Company's development
area as it has been done in other metropolitan areas of the country, there can
be no assurances that this effort will be successful in Texas.
LABOR COSTS, AVAILABILITY OF EMPLOYEES
Similar to its Italian and steakhouse restaurants, the Company needs to
hire essentially unskilled workers for each bagel bakery, although fewer
workers are required for a bakery compared to a full-service restaurant.
While the Company pays wages higher than the statutory minimum wage in every
bagel bakery, the minimum wage nevertheless has a direct proportionate impact
on the actual wages the Company is required to offer to compete for available
employees. In addition, on September 1, 1997, a federally mandated wage
increase became effective. In response to this minimum wage increase, the
Company implemented menu price increases at its full-service restaurants
which took effect October 1, 1997. These increases have partially offset the
cost of the wage increases. This minimum wage increase is not expected to
have a material
7
<PAGE>
effect on the Company's bagel bakeries as all employee pay rates are already
at or above the new minimum wage. See "Business - Government Regulation."
COSTS OF CONSTRUCTION MATERIALS
The construction of any bagel bakery involves several building materials,
such as construction-grade and furniture-grade lumber, stainless steel, and
plastic laminates, which are highly sensitive to nationwide price fluctuations.
Any significant price increases of such materials will increase the construction
costs of any bakery and will consequently have an adverse effect on its
profitability.
RELIANCE ON COMMISSARY OF THIRD PARTY
Currently, the Company obtains its shaped bagel dough, as well as other
food supplies from a commissary owned by Bruegger's. While the current
arrangement represents the most cost effective way of obtaining bagel dough and
other supplies, the closing of the commissary or the inability of the Company to
receive its supplies from the commissary, would have a severe and immediate
impact on the continuation of the Company's business in the Dallas-Fort Worth
area. The Company expects to build its own commissary in calendar 1998.
GOVERNMENT REGULATION
The Company's business is subject to extensive state and local government
regulation in the various jurisdictions in which its full-service restaurants
and bagel bakeries are located, including regulations relating to alcoholic
beverage control, public health and safety and fire codes. The failure to
obtain or retain required licenses could adversely affect the operation of the
Company's restaurants. While the Company has not experienced, and does not
anticipate any problems in obtaining required licenses, permits or approvals,
any difficulties, delays or failures in obtaining such licenses, permits or
approvals could delay or prevent the opening of a restaurant in a particular
area.
QUOTATION ON THE NASDAQ OTC BULLETIN BOARD
On October 8, 1997, the Company's Common Stock was delisted from the Nasdaq
SmallCap Market because of the Company's inability to comply with the Nasdaq
SmallCap Market shareholders' equity requirement. The Company's Common Stock is
now quoted on the Nasdaq OTC Bulletin Board. There can be no assurance that a
deep and liquid market will ever develop in the Company's Common Stock or in its
Warrants.
8
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from this Offering are expected to be
$565,000 if the minimum number of Units offered hereby are sold and $2,465,000
if the maximum number of Units offered hereby are sold, after payment of all
legal, accounting, and filing fees and miscellaneous expenses related to the
Offering (estimated at approximately $35,000).
The following table sets forth the anticipated use of the net proceeds
from this Offering over the next twelve months, assuming the minimum and
maximum number of Units are sold:
<TABLE>
<CAPTION>
Minimum Maximum
------- -------
<S> <C> <C>
Repayment of Subordinated Debt....... $200,000 $ 200,000
Accounts Payable..................... 200,000 350,000
Bakery Pre-opening Expenses.......... 50,000 275,000
Construction of Commissary........... -- 500,000
Advertising.......................... 90,000 180,000
Commissary Pre-opening Expenses...... -- 50,000
Inventory and Supplies............... 10,000 100,000
Repayment of Related Party Debt...... -- 400,000
General Working Capital Purposes..... 15,000 410,000
------- ----------
Total................................ $565,000 $2,465,000
------- ----------
------- ----------
</TABLE>
The Company is issuing these Units to raise working capital, including
marketing and promotion of its Bruegger's Bagel Bakery restaurants. Under the
Development Agreement, DFW must have nine bagel bakeries open by July 1, 1998
and thirty bagel bakeries open by July 1, 2002. The Company may also use part
of any capital raised for other general business purposes.
The Company currently intends to finance its construction of bagel
bakeries from lease financing. The Company believes each site will require
approximately $370,000 of capital expenditures, including the $20,000 initial
franchise fee. The initial franchise fee has been waived however, for any
bagel bakeries opened in calendar 1998. It anticipates financing its
commissary during the fourth quarter of this fiscal year through lease
financing, use of proceeds of this offering or a combination of these
sources. In order to finance certain working capital requirements, during the
period of June 1997 through August 1997, the Company has borrowed $400,000
from L.E. "Dan" Danford, Jr., the Chairman of the Board of Directors of the
Company, pursuant to an unsecured 10.5% Promissory Note that is payable on
December 31, 1998.
If the Company decides to pursue a strategy of building bagel bakeries
at a rate faster than that required by the Development Agreement, it may need
funds in addition to those generated from this Offering. In such event, the
Company will attempt to raise additional funds through debt or equity
offerings. If the Company is unable to successfully raise funds from this
Offering or otherwise in a timely manner, it may be necessary for it to raise
additional capital through other means
9
<PAGE>
of financing. Although the Company believes that it will be able to secure
the necessary capital, there can be no assurances that the Company will be
successful in such efforts. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
The above amounts and categories for use of the proceeds of this
Offering represent management's best estimate based upon current conditions
and assumptions as to anticipated levels of investment among the foregoing
categories. Although no material changes are contemplated in the proposed
use of proceeds, the Company reserves the right to adjust such amounts by
reason of business conditions existing at the time of expenditure. Pending
application of the proceeds of the Offering, the proceeds will be invested in
short-term liquid securities.
10
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Until October 8, 1997 when it was delisted from the Nasdaq system, the
Company's Common Stock was traded on the Nasdaq SmallCap Market under the symbol
"CIAT." The Company Stock is now quoted on the Nasdaq OTC Bulletin Board under
the symbol PREC. The following table sets forth the range of high and low
prices for the Company's Common Stock on the Nasdaq SmallCap Market for fiscal
1996 and 1997 and on the Nasdaq OTC Bulletin Board for periods subsequent to
October 8, 1997. The prices listed below indicate inter-dealer prices without
retail mark up, mark down or commissions. They may not necessarily represent
actual transactions.
<TABLE>
<CAPTION>
FISCAL YEAR LOW HIGH
--- ----
<S> <C> <C>
1996 First Quarter $3.75 $5.00
Second Quarter 4.00 6.125
Third Quarter 4.25 6.25
Fourth Quarter 2.75 5.25
1997 First Quarter $3.50 $5.00
Second Quarter 2.50 4.00
Third Quarter 1.25 1.625
Fourth Quarter 1.25 1.625
1998 First Quarter $0.62 $2.75
Second Quarter 1.25 2.00
Third Quarter (through February 18, 1998) 1.25 1.625
</TABLE>
The closing bid and ask prices for the Company's Common Stock as reported
on the Nasdaq OTC Bulletin Board on February 2, 1998 were $1.25 and $1.625,
respectively. As of February 2, 1998, the Company had 79 shareholders of
record, plus an additional 386,950 shares held by depository institutions for an
undetermined number of additional shareholders. The total number of outstanding
shares was 742,819.
The Company has not paid cash dividends on its Common Stock in the past and
does not intend to pay cash dividends in the foreseeable future.
11
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the fiscal years
ended June 27, 1993, July 3, 1994, July 2, 1995, June 30, 1996 and June 29,
1997 have been derived from audited financial statements of the Company for
the fiscal years then ended. This data should be read in conjunction with
the consolidated financial statements, related notes and other financial
information, included or incorporated by reference, elsewhere in this
Prospectus. For current information, see the Form 10-QSB delivered with this
Prospectus.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
TWENTY-SIX
FISCAL YEAR (1) WEEKS ENDED
--------------------------------------------------------- -------------------------
DECEMBER DECEMBER
1993 1994 1995 1996 1997 29, 1996 28, 1997
---- ---- ---- ---- ---- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales
Full-service restaurants $22,359 $22,969 $18,935 $16,962 $15,811 $ 7,786 $ 5,896
Bagel bakeries -- -- -- 627 1,927 880 1,386
------------------------------------------------------------------------- ----------
Total sales 22,359 22,969 18,935 17,589 17,738 8,666 7,282
Cost of food and beverage 6,760 6,848 5,781 5,191 5,371 2,642 2,264
------------------------------------------------------------------------- ---------
Gross profit 15,599 16,121 13,154 12,398 12,367 6,024 5,018
Restaurant operating expenses
Labor and benefits 7,590 7,383 6,266 6,145 6,304 3,141 2,645
Direct and occupancy 7,001 7,039 5,722 6,375 6,625 3,117 3,011
General and administrative 1,173 1,347 1,054 1,305 1,305 683 671
Gain on sale of full-service restaurants -- -- -- -- -- -- (926)
Loss from closure of bagel bakery -- -- -- -- -- -- 63
Impairment of assets write-down -- -- -- 78 640 640 91
------------------------------------------------------------------------- ----------
Total restaurant and operating expenses 15,764 15,769 13,042 13,903 14,874 7,581 5,555
------------------------------------------------------------------------- ----------
Earnings (loss) from operations (165) 352 112 (1,505) (2,507) (1,557) (537)
Other income (expense), net (70) 92 88 (18) (69) (28) (103)
Income tax (expense) benefit (107) (134) (6) 160 7 10 -
------------------------------------------------------------------------- ----------
Net earnings (loss) ($342) $310 $194 ($1,363) ($2,569) ($1,575) ($640)
------------------------------------------------------------------------- ----------
------------------------------------------------------------------------- ----------
Net earnings (loss) per share
Basic ($0.42) $0.41 $0.27 ($1.85) ($3.46) ($2.12) ($0.86)
Diluted ($0.42) $0.40 $0.26 ($1.85) ($3.46) ($2.12) ($0.86)
Weighted average number of
shares outstanding
Basic 805,118 751,785 727,639 736,917 742,819 742,819 742,819
Diluted 805,118 768,343 762,089 736,917 742,819 742,819 742,819
</TABLE>
CONSOLIDATED BALANCE SHEET DATA
(at end of period)(in thousands)
<TABLE>
<CAPTION>
FISCAL YEAR (1)
------------------------------------------------------ DECEMBER
1993 1994 1995 1996 1997 28, 1997
---- ---- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Current assets $2,308 $2,763 $2,713 $2,184 $1,420 $ 870
Current liabilities 2,219 2,201 1,969 2,569 3,292 3,216
Total assets 7,899 7,206 7,684 6,652 4,663 3,878
Long-term obligations, less
current maturities 1,491 655 1,179 908 765 696
</TABLE>
(1) The Company's fiscal year ends on the Sunday closest to June 30. Fiscal
1994 was a fifty-three week year while fiscal 1993, 1995, 1996 and 1997
were fifty-two week years.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS PROSPECTUS, INCLUDING THE INFORMATION SET FORTH IN THIS SECTION AND
THE INFORMATION INCORPORATED BY REFERENCE HEREIN, CONTAINS FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933
AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. ACTUAL RESULTS COULD
DIFFER SIGNIFICANTLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS
AS A RESULT, IN PART, OF THE RISK FACTORS SET FORTH IN THIS PROSPECTUS. IN
CONNECTION WITH THE FORWARD-LOOKING STATEMENTS WHICH APPEAR IN THESE
DISCLOSURES, PROSPECTIVE PURCHASERS OF THE UNITS OFFERED HEREBY SHOULD
CAREFULLY REVIEW THE FACTORS SET FORTH IN THIS PROSPECTUS UNDER "RISK
FACTORS."
RESULTS OF OPERATIONS
The following sets forth certain financial data expressed as a
percentage of sales for the fiscal years ended June 27, 1993, July 3, 1994,
July 2, 1995, June 30, 1996 and June 29, 1997 and the twenty-six weeks ended
December 29, 1996 and December 28, 1997. Fiscal 1994 was a fifty-three week
year while fiscal 1993, 1995, 1996 and 1997 were fifty-two week years.
<TABLE>
<CAPTION>
TWENTY-SIX
FISCAL YEAR (1) WEEKS ENDED
------------------------------------------------------- ---------------------
1993 1994 1995 1996 1997 DECEMBER DECEMBER
---- ---- ---- ---- ---- 29, 1996 28, 1997
--------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales
Full-service restaurants 100.0% 100.0% 100.0% 96.4% 89.1% 89.8% 81.0%
Bagel bakeries -- -- -- 3.6% 10.9% 10.2% 19.0%
------------------------------------------------------- ----------------------
Total sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of food and beverage 30.2% 29.8% 30.5% 29.5% 30.3% 30.5% 31.1%
------------------------------------------------------- ----------------------
Gross profit 69.8% 70.2% 69.5% 70.5% 69.7% 69.5% 68.9%
Restaurant operating expenses
Labor and benefits 33.9% 32.1% 33.1% 34.9% 35.5% 36.2% 36.3%
Direct and occupancy 31.3% 30.7% 30.2% 36.2% 37.3% 36.0% 41.4%
General and administrative 5.3% 5.9% 5.6% 7.5% 7.4% 7.9% 9.2%
Gain on sale of full-service restaurants -- -- -- -- -- -- (12.7%)
Loss from closure of bagel bakery -- -- -- -- -- 0.9% 0.8%
Impairment of assets write-down -- -- -- 0.4% 3.6% 7.4% 1.3%
------------------------------------------------------- --------------------
Total restaurant and operating expenses 70.5% 68.7% 68.9% 79.0% 83.8% 87.5% 76.3%
------------------------------------------------------- ---------------------
Earnings (loss) from operations (0.7%) 1.5% 0.6% (8.5%) (14.1%) (18.0%) (7.4%)
Other income (expense), net (0.3%) 0.4% 0.4% (0.1%) (0.4%) (0.2%) (1.4%)
Income tax (expense) benefit (0.5%) (0.6%) -- 0.9% -- 0.1% --
-------------------------------------------------------- ---------------------
Net earnings (loss) (1.5%) 1.3% 1.0% (7.7%) (14.5%) (18.2%) (8.8%)
-------------------------------------------------------- ---------------------
-------------------------------------------------------- ---------------------
</TABLE>
COMPARISON OF TWENTY-SIX WEEKS ENDED DECEMBER 28, 1997 TO TWENTY-SIX WEEKS
ENDED DECEMBER 29, 1996
SALES
Consolidated sales of $7,282,598 for the first twenty-six weeks of fiscal
1998 were down 16.0% from consolidated sales of $8,665,462 reported during the
first twenty-six weeks of fiscal 1997. The decrease in consolidated sales
during fiscal 1998 was due to a decline in sales at the Company's full-service
restaurants offset by an increase in sales at the Company's bagel bakeries, as
described below.
13
<PAGE>
Full-service restaurant sales of $5,896,382 for the first twenty-six
weeks of fiscal 1998 decreased 24.3% from sales of $7,785,702 for the same
period of fiscal 1997. This decrease in full-service restaurant sales was
due, in part, to the Company selling three of its full-service restaurants in
the first quarter of fiscal 1998, and two of its full-service restaurants in
the second quarter of fiscal 1998. In addition, this decrease in sales was
due to the increased competition of national chain restaurants in each of the
markets in which the Company's Italian and Steakhouse restaurants operate.
The Company expects competition to intensify and, therefore, most of the
Company's restaurants will continue to face significant pressure to maintain
sales levels. To offset this, the Company developed a new menu that was
introduced to the Italian restaurants in September 1997. The focus of the
new menu is to increase portion sizes and increase the offerings of chicken
and seafood in order to create a higher quality and value to the customer.
In addition, the purpose of the new menu is to increase the check average per
person without decreasing the value. As of December 28, 1997 the Company has
seen an increase in the check average per person.
Sales at the Company's bagel bakeries of $1,386,216 for the first
twenty-six weeks of fiscal 1998 increased 57.6% over bagel bakery sales of
$879,760 for the same period of fiscal 1997. This increase in sales was
primarily a function of the Company having seven bagel bakeries open as of
December 28, 1997, while having five bagel bakeries open as of December 29,
1996. The Company closed one of its bagel bakeries in November 1997.
COST OF FOOD AND BEVERAGE
Cost of food and beverage as a percentage of sales increased to 31.1%
for the first twenty-six weeks of fiscal 1998 from 30.5% for the same period
of fiscal 1997. These costs were up due to the mix of the Company's business
including a larger percentage of bagel bakery sales, which have a slightly
higher cost of food and beverage associated with them.
The Company does not expect the cost of food and beverage to increase
significantly in the future. The Company expects to construct a commissary
in calendar 1998 to lower the food and beverage costs associated with its
bagel bakeries and believes the addition of the new menu at the Company's
Italian restaurants will help to lower their cost of food and beverage as a
percent of sales.
LABOR AND BENEFITS
Labor and benefit costs as a percentage of sales increased to 36.3% for the
first twenty-six weeks of fiscal 1998 compared to 36.2% during the same period
of last year. This slight increase was primarily due to the minimum wage
increase that took effect on September 1, 1997. In response to this minimum
wage increase, the Company implemented menu price increases at its full-service
restaurants which took effect October 1, 1997. These increases have partially
offset the cost of the wage increases. This minimum wage increase is not
expected to have a material effect on the Company's bagel bakeries as all
employee pay rates are already at or above the new minimum wage.
DIRECT AND OCCUPANCY
Direct and occupancy costs increased to 41.4% of sales for the first
twenty-six weeks of fiscal 1998 compared to 36.0% of sales during the same
period of last year. This increase was primarily due to the fact that the
Company is currently paying rent on four bagel bakery leases that are not yet
under construction. Bagel bakeries will not be constructed at these locations
until financing can be acquired. Secondly, the Company increased its
advertising and promotional costs at its full-service restaurants from 1.9% of
sales for the first twenty-six weeks of fiscal 1997 to 6.1% of sales for the
same period of fiscal 1998. The Company expects advertising and promotional
expenses to decrease to 4.0% for the remainder of fiscal 1998. The Company is
obligated by its development agreement with Bruegger's to spend a minimum of 2%
of sales on advertising and, following its current practice, expects to spend
between 4% and 5% of bakery sales in the near future. Lastly, direct and
occupancy costs at the Company's bagel bakery restaurants were affected by fixed
costs such as rent and depreciation being spread across a lower sales base than
at its full-service restaurants. As sales at the Company's bagel bakery
restaurants increase in the future, these fixed costs will decrease as a percent
of sales.
GENERAL AND ADMINISTRATIVE
14
<PAGE>
General and administrative costs as a percentage of sales increased to
9.2% for the first twenty-six weeks of fiscal 1998 compared to 7.9% of sales
for the same period of last year. This increase in general and
administrative costs was primarily due to the Company incurring approximately
$217,000 of general and administrative costs in the first and second quarters
of fiscal 1998 relating to the development of a corporate infrastructure at
its bagel bakery operation, as compared to only $122,000 of costs in the
first and second quarters of fiscal 1997. The Company also had increased
professional fees pertaining to its attempts to acquire financing for its
bagel bakery concept.
GAIN ON SALE OF FULL-SERVICE RESTAURANTS
The Company sold two of its full-service restaurants during the second
quarter of fiscal 1998. The restaurants are located in St. Cloud, Minnesota and
LaCrosse, Wisconsin. The sale of these restaurants generated proceeds of
approximately $852,000. The gain recognized on the sale of the two restaurants
sold in the second quarter of fiscal 1998 was $440,086. The Company sold three
of its full-service restaurants in the first quarter of fiscal 1998. The
restaurants are located in Burnsville, Falcon Heights and Woodbury, Minnesota.
The sale of these restaurants generated proceeds of approximately $975,000. The
gain recognized on the sale of the three restaurants sold in the first quarter
of fiscal 1998 was $486,255.
LOSS FROM CLOSURE OF BAGEL BAKERY
In November 1997, the Company closed one of its bagel bakeries located in
Irving, Texas. This bakery was an experimental site, as it was connected to a
gas station and was only one-third the size of a standard bakery. The Company
determined it was unlikely that this bakery would generate the sales necessary
to achieve profitability. The Company recognized a loss of $63,039 on the net
book value of the leasehold improvements at the bakery.
WRITE-DOWN OF IMPAIRED ASSETS
During the second quarter of fiscal 1998, the Company recognized an
impairment loss of $90,732 for the long-lived assets at its Maplewood, Minnesota
restaurant. The Company has determined that the geographic area this restaurant
is located in can no longer support two Italian restaurants (Ciatti's Italian
Restaurant and a competitor restaurant) in such close proximity to each other.
In addition, the Company attempted several advertising and promotional campaigns
during the first twenty-six weeks of fiscal 1998 that did not produce the
results management expected. Based on these items, management revised its
forecasts for this restaurant and projected operating losses and cash flow
deficits for the remainder of the restaurant's lease, which expires in 2000.
Accordingly, the Company has fully written off the long-lived assets at this
restaurant.
OTHER INCOME (EXPENSE), NET
Other income (expense) increased to a net expense of $103,094 for the first
twenty-six weeks of fiscal 1998 from a net expense of $27,846 during the same
period of last year. This increase in expense was primarily due to the Company
carrying higher debt as a result of the construction of the Company's bagel
bakeries.
INCOME TAX EXPENSE (BENEFIT)
For the twenty-six weeks ended December 28, 1997, no tax benefit was
recorded for the losses generated because no taxes would have been recoverable
from a carryback of the net losses. For the twenty-six weeks ended December 29,
1996, the Company recorded an income tax benefit of $10,108 which was due to the
receipt of state and federal income taxes in excess of the amount recorded as an
income tax receivable as of June 30, 1996, offset by state and franchise taxes
paid during fiscal 1997. There was no tax benefit recorded for the losses
generated during fiscal 1997 because no taxes would have been recoverable from a
carryback of the net losses. As of December 28, 1997, the Company has
approximately $166,000 of alternative minimum tax credit carryforwards and
$3,282,000 in net operating loss carryforwards. These tax carryforwards may
only be utilized against future earnings and there is no assurance that the
Company will realize these benefits. The utilization of these carryforwards may
be limited if there are significant changes in the ownership of the Company.
SEASONALITY
15
<PAGE>
The Company's highest sales from its Italian and Steakhouse restaurants
have historically occurred during the months of July through December. The
Company's bagel bakeries' highest sales have occurred during the period from
September through May.
EFFECTS OF INFLATION
Inflationary factors such as increases in food and labor costs directly
affect the Company's operations. Because most of the Company's employees are
paid hourly rates related to federal and state minimum wage and tip credit
laws, changes in these laws may result in an increase in the Company's labor
costs. The Company cannot always effect immediate price increases to offset
higher costs, and no assurance can be given that the Company will be able to
do so in the future.
COMPARISON OF FIFTY-TWO WEEKS ENDED JUNE 29, 1997 TO FIFTY-TWO WEEKS ENDED JUNE
30, 1996
SALES
Sales for fiscal 1997 increased $148,617, or .8%, to $17,737,804 from
fiscal 1996 sales of $17,589,187. The increase in consolidated sales during
fiscal 1997 was due to an increase in sales at the Company's bagel bakeries
which was offset by a decline in sales at the Company's full-service
restaurants as described below.
Full-service restaurant sales of $15,811,370 for fiscal 1997 decreased
6.8% from sales of $16,962,135 for the same period of fiscal 1996. This
decrease in full-service restaurant sales was due, in part, to the Company
closing its Glendale, Wisconsin restaurant on September 8, 1996. After
adjusting for the sale of this restaurant, year-to-date full-service
restaurant sales were down $399,460, or 2.5%, when compared to the same
period last year.
Bagel bakery sales of $1,926,434 for fiscal 1997 increased $1,299,382,
or 207.2%, over bagel bakery sales of $627,052 for fiscal 1996. This
increase in sales was primarily a function of the Company having seven bagel
bakeries open as of June 29, 1997, while only having four bagel bakeries open
as of June 30, 1996.
COST OF FOOD AND BEVERAGE
The cost of food and beverage was 30.3% of sales in fiscal 1997, an
increase from the 29.5% of sales reported in fiscal 1996. The increase in
the cost of food and beverage for fiscal 1997 was primarily due to the
Company's bagel bakery concept operating at higher cost levels than its
full-service restaurants. In addition, increases during the first two
quarters of this fiscal year in the costs of selected products at the
Company's full-service restaurants occurred without corresponding menu price
increases.
LABOR AND BENEFITS
Labor and benefit costs were 35.5% of sales in fiscal 1997, an increase
from the 34.9% of sales reported in fiscal 1996. The increase in labor and
benefits costs as a percent of sales for fiscal 1997 was mainly due to the
Company's bagel bakery concept operating at higher cost levels than its
full-service restaurants. In addition, increases occurred in labor and
benefit costs as a percentage of sales at the Company's full-service
restaurants during the first and second quarters of the fiscal year.
The federally mandated minimum wage increases which became effective
October 1, 1996 did not have a significant impact on the Company's financial
results. On September 1, 1997, another minimum wage increase became
effective. In response to this wage increase, the Company implemented menu
price increases at its full-service restaurants effective October 1, 1997.
DIRECT AND OCCUPANCY
Direct and occupancy costs primarily include individual restaurant
advertising, promotion, supplies, utilities, occupancy and depreciation
expenses. These costs were 37.3% of sales in fiscal 1997, an increase from
the 36.2% reported last year. This increase was due to the following three
reasons. First, the Company increased its advertising and promotion costs
from 3.6% of sales during fiscal 1996 to 4.5% of sales in fiscal 1997.
Second, lower sales levels at the full-service restaurants caused fixed costs
such as occupancy and depreciation to be spread over a smaller sales base,
thus increasing
16
<PAGE>
those respective percentages as compared to sales. Third, the Company
incurred significant costs related to the start-up of the bagel bakeries.
GENERAL AND ADMINISTRATIVE
General and administrative costs were 7.4% of sales for fiscal 1997 and
fiscal 1996. The Company incurred approximately $208,000 of additional
general and administrative costs related to operating additional bagel
bakeries in fiscal 1997. The Company also had increased professional fees
which were partially offset by the recovery of a note receivable that had
been fully reserved for.
WRITE-DOWN OF IMPAIRED ASSETS
Due to events occurring during fiscal 1997, the Company recognized an
impairment loss of $640,286 for the long-lived assets at its Madison,
Wisconsin restaurant. During fiscal 1997, a major national competitor opened
a steakhouse restaurant in close proximity to the Company's restaurant. The
competitor's restaurant has the Company's restaurant out-positioned in the
market area, and sales at the Company's restaurant have suffered due to the
opening of this restaurant. In addition, the Company attempted several
advertising and promotional campaigns during the first half of fiscal 1997
that did not produce the results management expected. Based on these
factors, management revised its forecasts for this restaurant and projected
operating losses and cash flow deficits for the remainder of the restaurant's
lease, which expires in 2005. Accordingly, the Company has fully written off
the long-lived assets at this restaurant.
During fiscal 1996, the Board of Directors resolved to close its
full-service restaurant located in Glendale, Wisconsin, effective September
8, 1996. Accordingly, the Company recorded a $77,691 charge during fiscal
1996 to write-off the assets at this location.
OTHER INCOME (EXPENSE), NET
Other income (expense) increased to a net expense of $69,140 in fiscal
1997 from a net expense of $17,601 in fiscal 1996. The Company's interest
expense increased to $105,460 in fiscal 1997 from $92,634 in fiscal 1996 as a
result of higher debt in 1997 due primarily to the construction of the
Company's bagel bakeries. The Company's investment income decreased to
$18,097 in fiscal 1997 from $59,526 in fiscal 1996 primarily as a result of
fewer funds available for investment.
INCOME TAX BENEFIT
The income tax benefit for fiscal 1997 was $7,633 as compared to
$160,000 in fiscal 1996. The fiscal 1996 tax benefit recorded reflects the
amount of taxes recoverable from the carryback of losses; there was no tax
benefit recorded for the losses generated during fiscal 1997. The Company's
fiscal 1997 tax benefit was due to the receipt of state and federal income
taxes in excess of the amount recorded as an income tax receivable as of June
30, 1996. The fiscal 1997 tax benefit was offset by $7,025 of state and
franchise taxes paid during the year.
LIQUIDITY AND CAPITAL RESOURCES
At December 28, 1997 the Company had cash and cash equivalents on hand
of $576,851, which represents an increase of $122,694 from the $454,157 in
cash and cash equivalents reported as of June 29, 1997. Net cash used in
operating activities was $1,671,758 for the first twenty-six weeks of fiscal
1998. For the first twenty-six weeks of fiscal 1998 the Company incurred a
net loss of $548,764 which was net of a gain of $926,341 pertaining to the
sale of five of the Company's full-service restaurants. In addition, the
Company reduced its accounts payable balance by $578,689 for the first
twenty-six weeks of fiscal 1998 as a result of the sale of the five
full-service restaurants. These uses of cash were partially offset by
non-cash depreciation and amortization expense of $455,392.
Net cash provided by investing activities was $1,413,105 during the
first twenty-six weeks of fiscal 1998 which is the net of $1,483,423
generated from the sale of five of the Company's full-service restaurants,
$5,813 from collections on notes receivable, and $76,131 for the purchase of
leasehold improvements and equipment for bagel bakeries.
Net cash provided by financing activities was $381,347 for the first
twenty-six weeks of fiscal 1998. The net cash provided by financing
activities consists of borrowings from the Chairman of the Board of Directors
of the Company of
17
<PAGE>
$300,000 and borrowings of $151,390 from a note offering commenced in June
1997. These borrowings were partially offset by payments of $70,043 due
under other debt financing.
DFW Bagels, Inc. (DFW), a wholly-owned subsidiary of Premium Restaurant
Company, has entered into an exclusive development agreement with Bruegger's
Franchise Corporation (Bruegger's). This agreement, as last amended in
November 1997, requires DFW to build thirty bagel bakeries by July 1, 2002.
Through January 30, 1998, DFW Bagels has opened seven bagel bakeries and is
required to open two additional bagel bakeries by July 1, 1998. Currently,
DFW has entered into lease agreements for four additional bagel bakery sites.
The Company intends to open bagel bakeries at a faster rate than that
obligated under the development agreement, subject to available financing.
The Company believes each new site will require approximately $370,000 for
capital expenditures, including pre-opening expenses and the initial
franchise fee.
During the period from May 1996 through October 1997, Bruegger's was
owned by Quality Dining, Inc. In October 1997, Bruegger's was sold back to
its original owners. The Company is working with the current owners of
Bruegger's to provide the Company with additional working capital and to
increase sales at the Company's bagel bakeries. The current owners of
Bruegger's have agreed to waive the initial franchise fees on any Bruegger's
Bagel Bakery restaurants opened in calendar 1998 and reduce franchise
royalties through calendar 1998.
The Company believes that the profitability of any individual bagel
bakery often depends to a high degree on the penetration of a particular
market by the bagel bakery operator. The Company believes that individual
bagel bakeries will generally become profitable only after the Company has
opened a number of bagel bakeries sufficient to make the franchise name
well-known in that market. The Company estimates that in the Dallas-Fort
Worth area the minimal number of bagel bakeries needed for such penetration
is between twelve and twenty. If the Company is unable to achieve this level
of penetration, its ability to achieve profitability may be affected. In
addition, if the Company is unable to obtain adequate financing to open the
bagel bakeries, it could have a material adverse effect on the Company's
consolidated financial position or results of operations.
In June 1997, the Company commenced a note offering of $2,000,000 in one
and three year notes. The Company is not currently offering any notes
pursuant to this offering, and has raised approximately $224,000 from the
offering.
As of December 28, 1997, the Company has borrowed $400,000 from the
Chairman of the Board of Directors of the Company pursuant to an unsecured
promissory note due December 31, 1998. Although the Company may borrow
additional amounts from Mr. Danford, there are no agreements between Mr.
Danford and the Company with respect to future financing or any guarantee
that such funds will be available.
The Company sold three of its full-service restaurants in September
1997, one of its full-service restaurants in October 1997 and one of its
full-service restaurants in November of 1997. The three restaurants sold in
September 1997 are located in Burnsville, Falcon Heights and Woodbury,
Minnesota. The restaurant sold in October 1997 is located in St. Cloud,
Minnesota, and the restaurant sold in November 1997 is located in LaCrosse,
Wisconsin. The sale of these restaurants generated proceeds of approximately
$1,827,000. The gain recognized on the sale of the three restaurants sold in
the first quarter of fiscal 1998 was $486,255 and the gain recognized on the
sale of the two restaurants sold in the second quarter of fiscal 1998 was
$440,086. The restaurants sold are initially being operated as Ciatti's
Italian Restaurants, however, the new operators have the right to change the
name. The Company decided to sell these restaurants to focus on achieving
and maintaining profitability at its remaining full-service restaurants and
to generate cash to continue to expand its bagel bakery concept in the
Dallas-Fort Worth market. During fiscal 1997, the restaurants sold generated
approximately $8,270,000 of sales, net earnings of $445,000 and cash flows
from operations of $799,000. Although the Company has no agreements to sell
any of its remaining full-service restaurants, it is exploring alternatives
to maximize its cash flow, including the possible sale of any of its
remaining full-service restaurants as well as sale and lease-back
opportunities.
The Company plans to finance its working capital and capital resource
needs with its current cash and proceeds from its current and future debt and
equity financing. The Company has and is continuing to explore several
alternatives for lease financing and equipment financing for its bagel
bakeries including sale and lease-back financing arrangements with respect to
its existing bakeries and full-service restaurants.
18
<PAGE>
The Company believes that these sources will be sufficient to enable it
to satisfy its working capital needs for the next twelve months. Because the
Company has decided to pursue a strategy of building bagel bakeries at a rate
faster than that required by the Development Agreement, it may need funds in
addition to those generated from this unit offering. In such event, the
Company will attempt to raise additional funds through debt or equity
offerings. If the Company is unable to successfully raise funds from this
unit offering in a timely manner, it may be necessary for it to raise
additional capital through other means of financing. Although the Company
believes that it will be able to secure the necessary capital, there can be
no assurance that the Company will be successful.
19
<PAGE>
BUSINESS
GENERAL
The Company owns and operates five full-service restaurants in Minnesota
and Wisconsin and seven "Bruegger's Bagel Bakery" restaurants in the
Dallas-Fort Worth, Texas area. Included in these full-service restaurants
are four Italian restaurants operating in Minnesota under the name "Ciatti's
Italian Restaurant" and one steakhouse restaurant operating in Wisconsin
under the name "Spurs Steakhouse & Saloon." All bagel bakeries are operated
under the name "Bruegger's Bagel Bakery" pursuant to the terms of a
development agreement and related franchise documents under which the
Company's subsidiary DFW Bagels, Inc acts as franchisee.
RESTAURANT DEMOGRAPHICS
BAGEL BAKERIES
As of February 2, 1998, DFW operated seven bagel bakeries in the
Dallas-Forth Worth area and has signed leases for an additional four
bakeries. These bagel bakeries range in size from 2,100 to 3,000 square feet
and seat between 45 and 50 customers. Most bagel bakeries also offer a
limited area for outdoor patio dining. Although, the Company opened a 520
square foot bagel bakery as part of a service station/convenience store in
Irving, Texas during the last quarter of fiscal 1997, it subsequently closed
that restaurant. In the future, the Company plans to open bagel bakeries
ranging in size from 1,800 to 2,200 square feet.
The following table sets forth the opening date and square footage of
the Company's bagel bakeries:
<TABLE>
<CAPTION>
APPROXIMATE
DATE OPENED LOCATION SQUARE FOOTAGE
-----------------------------------------------------------------------------
<S> <C> <C>
October, 1995 Plano (Lancer's Square) 3,000
December, 1995 Plano (Shepard Place) 2,250
February, 1996 Dallas (Preston Center) 2,500
June, 1996 Fort Worth (Bowie) 2,130
November, 1996 Dallas (Preston Campbell) 2,200
June, 1997 Fort Worth (Fossil Creek) 2,100
August, 1997 University Park 2,300
</TABLE>
In addition, the Company is paying rent in the aggregate amount of
$12,000 per month with respect to locations where the Company signed leases,
but has not yet constructed restaurants.
FULL-SERVICE RESTAURANTS
The Company currently operates four Italian restaurants in Minnesota and a
steakhouse restaurant in Wisconsin. The Company's Italian and steakhouse
restaurants range in size from 6,500 to 9,800 square feet. Each seats
between 70 and 100 customers in the lounge and between 110 and 220 customers
in the dining area. Some of the Company's restaurants also offer outdoor
patio dining on a seasonal basis.
The following table sets forth the opening date and square footage of
the Company's full-service restaurants:
<TABLE>
<CAPTION>
APPROXIMATE
DATE OPENED LOCATION SQUARE FOOTAGE
-----------------------------------------------------------------------------
<S> <C> <C>
September, 1984 Saint Paul, Minnesota 8,600
February, 1985 Madison, Wisconsin 9,800
November, 1988 Eden Prairie, Minnesota 7,800
February, 1990 Maplewood, Minnesota 7,800
October, 1991 Edina, Minnesota 6,500
</TABLE>
The Saint Paul restaurant is located in an urban area. The Madison,
Eden Prairie, Maplewood and Edina restaurants are located in suburban areas.
The actual cost of opening an Italian or steakhouse restaurant, including
leasehold
20
<PAGE>
improvements, furniture, fixtures, and equipment and other pre-opening costs
has varied from $480,000 to $930,000 per restaurant.
The Company has not opened any Italian or steakhouse restaurants in
recent years and has no plans to open any additional full-service restaurants
in the future. During the period September through November 1997, the
Company sold five of its full-service restaurants. The restaurants that were
sold were located in Burnsville, Falcon Heights, Woodbury and St. Cloud,
Minnesota and LaCrosse, Wisconsin. The sale of these restaurants generated
proceeds of approximately $1,827,000 and a gain of $926,341. The restaurants
sold are initially being operated as Ciatti's Italian Restaurants, however,
the new operators have the right to change the name. The Company decided to
sell these restaurants to focus on achieving and maintaining profitability at
its remaining full-service restaurants and to generate cash to continue to
expand its bagel bakery concept in the Dallas-Fort Worth market. During
fiscal 1997, the restaurants sold generated approximately $8,270,000 of
sales, net earnings of $445,000 and cash flows from operations of $799,000.
The Company will not have the benefit of this cash flow in the future.
Although the Company has no agreements to sell any of its remaining full
service restaurants, it is exploring alternatives to maximize its cash flow,
including the possible sale of any of its remaining full-service restaurants
as well as sale and lease-back opportunities.
RESTAURANT FORMATS
BAGEL BAKERIES
The Company's bagel bakeries specialize in 12 varieties of freshly baked
bagels and branded cream cheeses, as well as freshly ground, premium branded
coffee which is brewed fresh every 19 minutes. Bruegger's bagels are unique
because certified bagel masters make the bagels by kettle-boiling them in
malt and water and then baking them in a stone hearth oven. In addition,
each bagel bakery offers deli-style bagel sandwiches, freshly-made soups, and
other food and beverage items. The bagel bakeries are open from
approximately 6:30 a.m. to 7:00 p.m. each day, depending upon location, and
offer both carry-out and in-store dining.
The design and general layout of the Company's bagel bakeries are based
on plans and guidelines issued by Bruegger's. Bruegger's updated its plans
and designs for all bagel bakeries in 1995 and all of the Company's existing
bagel bakeries have been constructed following this new design. It is
anticipated that the new design will be the national standard for a number of
years. The Company's ability to make material changes to such design is
limited and any such change requires the written approval of Bruegger's. The
new design and ambiance is bright and clean looking, using materials to
withstand heavy customer use.
Bruegger's also issues standard plans for furniture, fixtures and
equipment ("FF&E"), including standard menu boards and art work. The Company
is required to equip each bakery with such FF&E. In a number of cases,
Bruegger's offers franchisees an option to purchase major equipment from two
different manufacturers.
ITALIAN RESTAURANTS
The Company's restaurants have traditionally had an Italian format. The
Company's Italian restaurants serve appetizers, pizza, soups, salads,
sandwiches, pasta, chicken, seafood, bread and desserts, together with
alcoholic and non-alcoholic beverages. Menu items are prepared at each
restaurant pursuant to the Company's uniform recipes and ingredient
specifications.
The Company has traditionally designed the dining areas and lounges of
its Italian restaurants to convey an atmosphere of casual elegance. The
dining area of each restaurant features booths and individual tables with
either chairs or banquettes. Each restaurant differs in interior design and
decor, depending upon the location and nature of the space. The Company
redesigned one of its restaurants to be a more informal, open-kitchen style
restaurant. Most restaurants accept reservations for a limited portion of
their dining area. The Company has lounge areas, which have full-service
liquor licenses, available in most restaurants for customers waiting to be
seated for dining. In most of the Company's restaurants, appetizers and
other menu items are available in the lounge as well as in the restaurant.
Each Italian restaurant employs a standardized menu with entree prices
ranging from $3.99 to $9.99 at lunch, and $5.99 to $15.95 at dinner. During
fiscal year 1997, food sales comprised approximately 77% and beverage sales
comprised approximately 23% of total full-service sales.
21
<PAGE>
The Company's Italian restaurants are typically open for lunch and dinner
daily during the year, except for Thanksgiving, Christmas Eve and Christmas Day.
Hours of operation may vary depending on local custom and customer traffic.
Menu service is normally available from 11:00 a.m. to 10:00 p.m. (9:00 p.m. on
Sunday). A Sunday brunch is served in some of the Minnesota restaurants from
10:00 a.m. to 2:00 p.m. Each restaurant's lounge is typically open from 11:00
a.m. until midnight (10:00 p.m. on Sundays). In addition to in-restaurant
dining, all of the menu items are available for carry-out. Carry-out sales
constitute a small portion of the Company's total sales.
STEAKHOUSE RESTAURANT
The Company's Madison, Wisconsin Spurs Steakhouse & Saloon restaurant has a
more casual atmosphere than the Company's Italian restaurants, with a menu that
features a Texas theme, featuring a variety of steaks, ribs, chicken, seafood,
sandwiches, salads, soups and appetizers. Prices at the steakhouse restaurant
range from $4.99 to $17.95 and the hours of operation are similar to those of
the Company's Italian restaurants.
RESTAURANT AND BAKERY OPERATIONS
The Company has established uniform operational standards for all of its
restaurants, which are maintained by each restaurant's management team in
accordance with the Company's manuals that emphasize quality of ingredients,
food preparation and presentation, maintenance of the restaurant premises and
employee training and conduct.
The Company's President supervises the operations of all restaurants with
the assistance of a Director of Operations for the bagel bakeries.
Additionally, a Vice President for Administration, a Corporate Controller and a
Corporate Chef administer their respective areas of responsibility at the
corporate office.
Each restaurant normally employs a general manager and assistant managers.
General managers have primary responsibility for restaurant operations,
including customer relations, food service, cost control, maintenance,
personnel, implementation of Company policies and procedures, and restaurant
profitability. Assistant managers share day-to-day responsibility for
restaurant operations. The Company has a bonus program to compensate its
managers and assistant managers for achieving sales, service and profitability
goals.
Supervisory personnel visit each restaurant an average of one day a week.
During these visits each aspect of the restaurant's operations is scrutinized to
ensure that the restaurant is being operated in conformance with Company
policies and procedures and that the Company's high levels of customer service
are being maintained.
For its Italian restaurants, the Company periodically prepares and revises
menu items, recipes and lists of approved ingredients. Menu items, recipes and
the ingredients used in preparing them are chosen based upon quality, cost and
customer acceptance. Each restaurant's food and beverage inventories and
supplies are purchased by the general managers directly from suppliers approved
by the Company.
All supplier invoices are paid at the Company's home office after approval
by the appropriate general manager. The Company believes it has a good working
relationship with its suppliers. The Company limits the number of its suppliers
to take advantage of volume discounts, to achieve better quality control and to
simplify the purchasing process for the general managers. Although the Company
purchases a majority of its food ingredients and restaurant supplies from a
single distributor, which is not uncommon in the restaurant industry, the
Company believes that its food and beverage supplies can be obtained from more
than one supplier if any one supplier is unable to meet the Company's demand or
quality specifications.
The Company maintains centralized financial and accounting controls for its
restaurants. Restaurant and bakery personnel are required to report sales and
deposit information to the Company on a daily basis. On a weekly basis, general
managers complete and forward to the Company a food and liquor inventory,
supplier invoices, payroll reports and other various information.
RESTAURANT DEVELOPMENT
The Company has entered into an exclusive Development Agreement with
Bruegger's. Bruegger's has indicated that as of February 2, 1998, directly or
through franchises, it operates in 52 metropolitan markets in 32 states.
22
<PAGE>
All franchisees are required to open a contractually specified number of
bakeries in their territory within a specified period of time or they will
lose their territorial franchise rights. Bruegger's has indicated that, as
of January 1, 1998, there were 423 Bruegger's Bagel Bakery restaurants open
for business, owned and operated by either Bruegger's or by franchisees.
Although Bruegger's is generally considered one of the largest bagel concepts
in the country, there are several franchise or company-owned systems with
aggressive development plans in direct competition in all areas of the
country.
The Company intends to devote significant resources to the development
of its bagel bakeries. This decision to concentrate on Bruegger's reflects
the Company's judgment concerning the potential market for bagel-based
restaurant concepts, the continuing appeal of the Bruegger's format to
customers and the Company's ability to successfully manage its growth.
The Company is concentrating its development efforts in the
socioeconomic well-to-do areas of the greater Dallas-Fort Worth area.
Experience gained from other Bruegger's franchises has shown that the typical
customer tends to be well educated and financially well-off. As of January
1, 1998, five bagel bakeries were open in the north-central portion of the
Dallas area, and two were opened in the Fort Worth area.
The ability of the Company to open additional bagel bakeries will depend
to a large degree on the availability of suitably sized spaces in desired
areas at economically justifiable terms. Other bagel chains, as well as
coffee houses, are vying for the same locations, thus providing strong
competition for space.
The cost of opening a new bagel bakery is approximately $370,000,
including the initial franchise fee. The cost of leasehold improvements for
the existing bakeries has averaged $175,000 per bakery, depending on the size
of the space, contributions by the lessor and the condition of the buildings.
The cost of equipment for the existing bakeries has averaged $150,000 for
each bakery. Other pre-opening expenses, including design services,
smallwares, training, and initial inventory is $45,000 for each bakery,
including the initial franchise fee. Bruegger's has agreed to waive the
$20,000 initial franchise fee for all Bruegger's Bagel Bakery restaurants
opened in calendar 1998 and reduced franchise royalties during 1998.
RELATIONSHIP WITH BRUEGGER'S
The development by DFW of bagel bakeries is based upon franchise
documents entered into between DFW and Bruegger's. The principal documents
are a Development Agreement dated as of January 1, 1995 and amended on April
23, 1997 and November 1997 and franchise agreements pertaining to each
existing bagel bakery.
The Development Agreement, as amended, gives DFW the right to construct,
own and operate bagel bakeries in the counties of Tarrant and Dallas, Texas
and certain areas immediately north of the City of Dallas, including the City
of Plano, Texas (the "Development Area"). The Development Agreement grants
DFW the exclusive right and obligation to develop thirty bagel bakeries
within the Development Area by July 1, 2002 on the following schedule:
<TABLE>
<CAPTION>
Minimum number
of bagel bakeries
DFW must have in
Deadline operation by deadline
--------------------------------------------------------------------------
<S> <C>
July 1, 1996 4
July 1, 1998 9
July 1, 1999 14
July 1, 2000 19
July 1, 2001 24
July 1, 2002 30
</TABLE>
DFW is to choose the sites for the bagel bakeries at its sole expense
but must seek site approval from Bruegger's in writing prior to beginning
construction. The Development Agreement also defines the relationship of DFW
to Bruegger's as that of independent contractor and states that none of the
rights granted therein may be assigned or otherwise transferred. In
addition, Premium Restaurant Company, agreed that any sales of its interest
in DFW shall be subject to a right of first refusal and prior written consent
by Bruegger's. Bruegger's has additional rights to acquire equity securities
of Premium Restaurant Company if Premium Restaurant Company's stock ceases to
be publicly traded.
23
<PAGE>
The Development Agreement may be renewed in one year increments after
the initial term if DFW continues opening bagel bakeries at the rate of three
per year. After five years of renewals, however, DFW is obligated to open
only one bagel bakery per year.
The Development Agreement gives DFW the exclusive right to operate bagel
bakeries in the Development Area. The Development Agreement provides,
however, that certain Bruegger's specialty products (specifically cheese
spreads and related products) may be distributed by a third party through
supermarkets, delicatessens, specialty food stores, convenience stores, and
other wholesale and retail food stores within the Development Area, but in
such event DFW has a right to act as distributor.
The Development Agreement provides that if DFW breaches any term of the
agreement, Bruegger's has the right to terminate the agreement.
The Development Agreement provides that DFW and Bruegger's will enter
into a predetermined franchise agreement for each bagel bakery opened by DFW.
Each franchise agreement grants DFW the right to establish and operate the
particular bagel bakery and to use the Bruegger's system and various
trademarks. The franchise agreement designates the locations approved
pursuant to the Development Agreement as the exclusive sites for the
operation of the bagel bakeries. Under the terms of the franchise agreement,
Bruegger's agrees to provide DFW with operation assistance, layout as well as
manuals, training and annual audits. The franchise agreement also states
that Bruegger's may at its discretion establish an Advertising Cooperative
(the "Coop") for certain geographic areas and that if DFW operates a bagel
bakery within such area it must immediately become a member of the Coop.
DFW's duties under the franchise agreement include constructing bagel
bakeries at its own expense from pre-approved plans and sending new managers
to Bruegger's training program. DFW also agrees that its bagel bakeries will
strictly conform to Bruegger's methods, such as its core products, management
of the business, fixtures, furnishings, and maintenance, and that it will
keep confidential the Operations and Bagel Production Manuals provided it.
In consideration of the rights granted it, DFW is obligated to pay certain
franchise and other fees to Bruegger's. Each franchise agreement has a term
of twenty years and may be renewed in ten year increments. If DFW chooses to
renew, the terms of the franchise agreement will change to whatever terms are
being offered new franchisees at the time of renewal.
RELIANCE ON COMMISSARY OF BRUEGGER'S
Currently, the Company obtains its shaped bagel dough, as well as other
food supplies from a commissary owned by Bruegger's. While the current
arrangement represents the most cost effective way of obtaining bagel dough
and other supplies, the closing of the commissary or the inability of the
Company to receive its supplies from the commissary, would have a severe and
immediate impact on the continuation of the Company's business in the
Dallas-Fort Worth area. The Company expects to build its own commissary in
calendar 1998.
FISCAL YEAR
The Company's fiscal year ends on the Sunday closest to June 30 of each
year. Therefore, the Company's fiscal years are either 52 or 53 week periods.
SEASONALITY
The Company's full-service restaurant sales historically have been the
highest during the period from July through December. The Company's bagel
bakeries' highest sales have occurred during the period from September
through May.
COMPETITION
The restaurant industry is intensely competitive and is affected by
changes in taste and eating habits of the public, local and national economic
conditions affecting spending habits, population and traffic patterns. Menu,
price, service, convenience, location, decor and atmosphere are all important
competitive factors, with the relative importance of such factors varying
among different segments of the consuming public. By serving high-quality
food and beverages at reasonable prices in pleasant, casual surroundings, the
Company seeks to appeal to a wide range of customers.
Although the full-service Italian restaurant market segment is highly
fragmented, a few regional and national chains compete directly against the
Company in this market segment. Dardens' concept, The Olive Garden, is
represented in the
24
<PAGE>
Company's Minnesota and Wisconsin markets. The Company's Italian and
Steakhouse restaurants compete not only with other chain or locally owned
restaurants with similar menus, but also with other full-service restaurants.
For its bagel bakeries, the Company's primary competitors are several
chain bagel operators offering menu items essentially similar to Bruegger's,
all vying for speedy market penetration. For example, Einstein Bagels is
represented in the Company's Development Area as well as are a number of
local, owner-operated bagel shops which in several cases have developed a
loyal local clientele. In addition, any quick-service or home-replacement
meal restaurants are competing with the Company for breakfast or lunch
customers.
Through the Bruegger's concept, the Company does, however, differentiate
itself from these competitors by providing its customers with bagels baked in
small batches on site throughout the day using fresh, not frozen, dough.
Additionally, by constructing and operating its own commissary to produce and
distribute fresh dough daily, the Company will vertically integrate its bagel
operations. This integration will allow the Company to provide its bagel
customers with a consistently high-quality product and to minimize
transportation and production costs.
ADVERTISING AND PROMOTION
The Company develops and executes annual advertising and promotional
programs customized to each of the markets in which the Company currently
operates. The Company has budgeted 2.75% of its projected fiscal 1998
full-service restaurant sales for advertising. Under the terms of the
franchise agreements with Bruegger's, the Company is required to spend
approximately 2% of its sales from the bakeries for advertising and
promotion, including advertising and promotions due in connection with
Bruegger's efforts. Due to the small number of bagel bakeries currently
existing in the franchise area, the majority of the Company's efforts in this
respect are directed to local store marketing and direct mail. As part of
its efforts to increase sales of its bagel bakeries, the Company intends to
spend between 4% and 5% of bagel bakery sales for advertising in the near
future. Television, radio or other wide coverage advertising could not be
economically justifiable until a larger number of bakeries exists in the
Company's territory.
GOVERNMENT REGULATION
Various federal, state and local laws affect the Company's restaurant
business, including laws and regulations relating to health, sanitation,
alcoholic beverage control and safety standards and access for disabled
persons. To date, federal and state environmental regulations have not had a
material effect on the Company's operations. Varied and sometimes stringent
requirements of local government bodies with respect to zoning, building
codes, land use and environmental factors have, in the past, increased, and
in the future can be expected to increase, the cost and time required for
developing new restaurants or bakeries. In some instances the Company may
have to obtain zoning variances and land use permits for its new restaurants
or bakeries. A significant portion of the Company's Italian and steakhouse
restaurant business is also derived from the sale of alcoholic beverages.
Any action by an alcoholic beverage control agency to suspend or revoke a
restaurant's liquor license would have an adverse effect on that restaurant's
business. The Company believes that it is operating in compliance with all
material laws and regulations covering its operations.
The Company is also subject to the Fair Labor Standards Act, which
covers such matters as minimum wages, overtime and other working conditions.
A significant portion of the Company's food service personnel are paid at
rates above, but related to, the minimum wage. Although the Company
implemented a menu-price increase at its full-service restaurants effective
October 1, 1997 to offset the September 1, 1997 minimum wage increase,
additional increases in state or federal minimum wage requirements or changes
in applicable state law with respect to minimum wages for "tipped" employees
may have an adverse impact on the Company.
TRADEMARKS AND LICENSES
The Company has obtained a trademark of the stylized words and design
for "Ciatti's Italian Restaurant," which was renewed in March 1994. The
Company also obtained a trademark for the words and design of "Spurs
Steakhouse & Saloon" in June 1994. Generally, federal registration of a
trademark gives the registrant the exclusive use of the trademark in the
United States in connection with the goods or services associated with the
trademark, subject to the common law rights of any other person who began
using the trademark prior to the date of federal registration. The Company
believes that its marks are important to its business.
25
<PAGE>
"Bruegger's" and "Bruegger's Bagel Bakery" are trademarks of Bruegger's
Franchise Corporation. Under the terms of the Development Agreement, DFW has
the right to use all trademarks associated with the Bruegger's bagels
franchise in connection with the operation of bagel bakeries in the
Dallas-Fort Worth area.
EMPLOYEES
As of January 30, 1998 the Company employed approximately 670 persons,
including 7 corporate employees, 39 restaurant and bakery managers and
assistant managers, and 624 hourly restaurant and bakery employees. Hourly
employees comprise approximately 93% of the Company's total work force and
most work on a part-time basis. Other than corporate and restaurant
management personnel, employees are paid on an hourly basis. No employees
are covered by collective bargaining agreements and no work stoppages have
occurred. The Company considers its employee relations to be good.
DESCRIPTION OF PROPERTY
The Company's existing restaurants are located in leased facilities, all
of which the Company believes to be adequate. The Company owns all of the
furniture, fixtures, and equipment in each of its restaurants. Leasehold
improvements paid for by the Company generally will become the property of
the landlord upon expiration or termination of a lease. The Company may
lease equipment in the future.
The Company's corporate offices are located in Edina, Minnesota, a
Minneapolis suburb. These premises include a test kitchen and a small
warehouse area. The lease currently runs through August 31, 1998, with the
Company having the option to renew the lease for an additional three year
term at the then current market rates. The Company believes this facility
will be adequate to accommodate its administrative needs for the foreseeable
future and that it will be able to renew its existing lease upon satisfactory
terms or obtain comparable space on satisfactory terms.
The Company leases real estate and improvements for its restaurants.
The leases for its Italian restaurants generally provide for an initial term
of ten or twelve years although one restaurant had an initial term of twenty
years. These leases generally have a minimum of two five-year renewal
options. Base rent under the Company's leases varies depending, in part,
upon leasehold allowance funds provided by the lessor. Base rent at some
locations also escalates during the term of the lease. At a few restaurants,
the Company also is required to pay a percentage rate between 4% and 5.5% of
sales in excess of specified amounts. The Company pays all real estate
taxes, insurance, utilities and maintenance expenses for its leased
properties.
The Company's leases for its bagel bakeries generally run for either
five or ten years, and have an option to renew for one or two additional five
year terms. The existing leases provide for a fixed rent for the primary
term in an amount that varies with the location.
LEGAL PROCEEDINGS
The Company is not subject to any pending legal proceedings.
CERTAIN TRANSACTIONS
In order to finance certain working capital requirements, during the
period of June 1997 through August 1997, the Company has borrowed $400,000
from L.E. "Dan" Danford, Jr., the Chairman of the Board of Directors of the
Company, pursuant to an unsecured 10.5% Promissory Note that is payable on
December 31, 1998. The Company anticipates that it may be necessary for it
to borrow additional funds from Mr. Danford in the future. There are,
however, no guarantees that funds will be available from Mr. Danford when
needed by the Company. The Company believes that the terms of the
transactions with Mr. Danford were no less favorable to the Company than
would have been obtained from an unaffiliated third party for similar
transactions. All future material affiliated transactions and loans will be
made or entered into on terms that are no less favorable to the Company than
those that can be obtained from unaffiliated parties. In addition, all
future material affiliated transactions and loans will be approved by a
majority of the Company's independent directors who do not have an interest
in the transactions.
26
<PAGE>
DESCRIPTION OF SECURITIES AND TERMS OF OFFERING
PLAN OF DISTRIBUTION
The Units will be sold directly by officers and other employees of the
Company, without an underwriter or selling agent. No commissions or other
remuneration will be paid in connection with the sale of the Units. These
Units are being sold by the Company's officers and directors. Until the
Company has received commitments to purchase 480,000 Units ($600,000), all
proceeds will be placed in an Escrow Account at Norwest Bank Minnesota, N.A.
If the minimum number of Units is not sold by June 30, 1998, then all
proceeds will be returned to subscribers with interest, less any escrow fees.
UNITS
Each Unit offered hereby consists of one share of Common Stock, $.01 par
value, and one Warrant to purchase one share of Common Stock. The Common
Stock and Warrants are detachable and separately transferable immediately.
COMMON STOCK
The Company's authorized capital stock consists of 10,000,000 shares of
Common Stock, $.01 par value, of which 742,819 shares were outstanding at
February 2, 1998.
Holders of Common Stock are entitled to receive such dividends as are
declared by the Board of Directors of the Company out of funds legally
available for the payment of dividends. The Company expects to retain any
earnings to finance the development of its business. Accordingly, the
Company does not anticipate payment of any dividends on the Common Stock for
the foreseeable future. In the event of any liquidation, dissolution or
winding-up of the Company, the holders of Common Stock will be entitled to
receive a pro rata share of the net assets of the Company remaining after
payment or provision for payment of the debts and other liabilities of the
Company.
Holders of Common Stock are entitled to one vote per share in all
matters to be voted upon by shareholders. There is no cumulative voting for
the election of directors, which means that the holders of shares entitled to
exercise more than 50% of the voting rights in the election of directors are
able to elect all of the directors. Holders of Common Stock have no
preemptive rights to subscribe for to purchase any additional shares of
Common Stock or other obligations convertible into shares of Common Stock
which may hereafter be issued by the Company.
All of the outstanding shares of Common Stock are, and the shares
included in the Units to be sold pursuant to this Offering will be, fully
paid and non-assessable. Holders of Common Stock of the Company are not
liable for further calls or assessments.
WARRANTS
WARRANT AGREEMENT
The Warrants included as part of the Units offered hereby will be issued
under and governed by the provisions of the Warrant Agreement between the
Company and Norwest Bank Minnesota, National Association, as Warrant Agent.
A copy of the Warrant Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The following
statements are summaries of certain provisions contained therein, are not
complete, and are qualified in their entirety by reference to the Warrant
Agreement.
The shares of Common Stock and the Warrants offered as part of the Units
are detachable and separately transferrable immediately for issuance. One
Warrant entitles the holder ("Warrantholder") thereof to purchase one share
of Common Stock through March 31, 2000. Each Warrant will be exercisable at
a price equal to $1.875 per share, subject to adjustment in certain
circumstances. Beginning January 1, 1999, the Warrants are redeemable, in
whole, by the Company at a redemption price of $.05 per Warrant on not less
than 30 days written notice, provided that the market price of the Common
Stock exceeds $3.50 per share (subject to adjustment) for any 20 consecutive
trading days within 15 days prior to such notice. "Market price" shall mean
(i) if the Common Stock is listed or admitted to unlisted trading privileges,
the last reported sale price of the Common Stock on such exchange on the last
business day prior to the date of exercise, or if no such sale is made on
such day, the average of the closing bid and asked prices for such day on
such exchange, or (ii) if
27
<PAGE>
the Common Stock is not so listed or admitted, the mean of the last reported
bid and asked prices reported by the Nasdaq OTC Bulletin Board on the last
business day prior to the date of exercise, or (iii) if the Common Stock is
not so listed, admitted or reported, an amount determined in such reasonable
manner as may be prescribed by the Board of Directors of the Company.
Holders of Warrants may exercise their rights until the close of business on
the date fixed for redemption, unless extended by the Company.
Warrantholders as such are not entitled to vote, receive dividends, or
exercise any of the rights of holders of shares of Common Stock for any
purpose until such Warrants have been duly exercised and payment of the
purchase price has been made. The Warrants are in registered form and may be
presented for transfer, exchange, or exercise at the corporate office of the
Warrant Agent. There is currently no established market for the Warrants, and
there is no assurance that any such market will develop.
The Warrant Agreement provides for adjustment of the exercise price and
the number of shares of Common Stock purchasable upon exercise of the
Warrants to protect Warrantholders against dilution in certain events,
including stock dividends, stock splits, reclassification and any combination
of Common Stock, or the merger, consolidation or disposition of substantially
all the assets of the Company.
REGISTRATION
The Company has sufficient shares of Common Stock authorized and
reserved for issuance upon exercise of the Warrants, and such shares when
issued will be fully paid and non-assessable. The Company must have a
current registration statement on file with the Securities and Exchange
Commission and, unless exempt therefrom, with the securities commission of
the state in which the Warrantholder resides in order for the Warrantholder
to exercise his or her Warrants and obtain shares of Common Stock free of any
transfer restrictions. The shares so reserved for issuance upon exercise of
the Warrants are registered pursuant to the Registration Statement for which
this Prospectus is a part. Furthermore, the Company has agreed to use its
best efforts to maintain an effective registration statement (by filing any
necessary post-effective amendments or supplements to the Registration
Statement) throughout the term of the Warrants with respect to the shares of
Common Stock issuable upon exercise thereof. The Company will incur
significant legal and other related expenses in order to keep such
registration statement current. There can be no assurance, however, that the
Company will be able to keep any such registration statement current or that
such registration statement will be effective at the time the Warrantholder
desires to exercise his or her Warrants. Additionally, the Company has
agreed to use its best efforts to maintain qualifications in those
jurisdictions where the Units were originally qualified for sale to permit
exercise of the Warrants and issuance of shares of Common Stock upon such
exercise. However, there can be no assurance that any such qualification
will be effective at the time the Warrantholder desires to exercise his or
her Warrants. If for any reason the Company's Registration Statement is not
kept current, or if the Company is unable to qualify its Common Stock
underlying the Warrants for sale in particular states, Warrantholders in
those states will, absent an applicable exemption, have no choice but to
either sell such Warrants or let them expire.
EXERCISE
The Warrants may be exercised upon surrender of the certificate
therefore on or prior to the expiration date (or earlier redemption date) at
the offices of the Company's Warrant Agent, with the "Purchase Form" on the
reverse side of the certificate filled out and executed as indicated,
accompanied by payment of the full exercise price (by certified or cashier's
check payable to the order of the Company) for the number of Warrants being
exercised.
For the term of the Warrants, the Warrantholders are given the
opportunity to profit from a rise in the market price of the Company's Common
Stock with a resulting dilution in the interest of the Company's
shareholders. During such term, the Company may be deprived of opportunities
to sell additional equity securities at a favorable price. The
Warrantholders may be expected to exercise their Warrants at a time when the
Company would, in all likelihood, be able to obtain equity capital by a sale
or a new offering on terms more favorable to the Company than the terms of
the Warrants.
TAX CONSIDERATIONS
The cost of each Unit will be allocable between each of its two elements
(one share of Common Stock and one Warrant) in accordance with their relative
fair market value to determine the adjusted basis of each element for federal
income tax purposes. No gain or loss will be recognized by a holder of a
Warrant upon purchase of Common Stock for cash
28
<PAGE>
pursuant to the exercise of the Warrant. The adjusted basis of a share of
Common Stock so acquired will equal the adjusted the Common Stock is not so
listed or admitted, the mean of the last reported bid and asked prices
reported by the Nasdaq basis of the Warrant plus the exercise price. There
may be other federal tax considerations, and state, local or foreign tax
considerations. Investors should consult their own tax advisors before
determining whether to purchase the Units or exercise the Warrants.
INDEMNIFICATION AND WAIVER OF DIRECTOR LIABILITY
The Minnesota Business Corporation Act provides that officers and
directors of the Company have the right to indemnification from the Company
for liability arising out of certain actions. Such indemnification may be
available for liabilities arising in connection with this offering. Insofar
as indemnification for liabilities arising under the Securities Act of 1933
may be permitted to directors, officers or persons controlling the Company
pursuant to such indemnification provisions, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
The Company has adopted in its Articles of Incorporation a provision
which limits personal liability for breach of the fiduciary duty of its
directors, to the extent provided 392A.251 of the Minnesota Business
Corporation Act. Such provision eliminates the personal liability of
directors for damages occasioned by breach of fiduciary duty, except for
liability based on a breach of the director's duty of loyalty to the Company,
liability for acts or omissions not made in good faith, liability for acts or
omissions involving intentional misconduct, liability based on payments of
improper dividends, liability based on violations of state securities laws
and liability for acts occurring prior to the date such provision was added.
Section 302A.521 of the Minnesota Business Corporation Act provides that
a Minnesota business corporation shall indemnify any director, officer,
employee or agent of the corporation made or threatened to be made a party to
a proceeding, by reason of the former or present official capacity (as
defined therein) of the person, against judgments, penalties, fines,
settlements and reasonable expenses incurred by the person in connection with
the proceeding if certain statutory standards are met. "Proceeding" means a
threatened, pending or completed civil, criminal, administrative, arbitration
or investigative proceeding, including one by or in the right of the Company.
Article IX of the Company's By-Laws provides that the Company shall
indemnify persons to the fullest extent permissible by the Minnesota
Corporation Act. Section 302A.521 contains detailed terms regarding such
right of indemnification and reference is made thereto for a complete
statement of such indemnification rights.
LIMITATION ON PURCHASES
In connection with the execution of a Settlement Agreement dated as of
April 23, 1997, the Company and Bruegger's agreed that Bruegger's would have
no right of consent for certain issuances of securities by Ciatti's,
including any issuance of securities by Premium Restaurant Company (i) if the
issuance does not result in the acquisition of over 40% of the voting power
of any class of securities of Premium Restaurant Company after the completion
of the issuance by any shareholder (other than Phillip R. Danford or L.E.
"Dan" Danford, Jr.) who previously held less than 40% of the voting power of
such securities and (ii) such issuance does not result in Phillip R. Danford
and L.E. "Dan" Danford, Jr. collectively owning less than 10% of the voting
power of all classes of securities of Premium Restaurant Company. In order
to ensure that no shareholder (other than Phillip R. Danford or L.E. "Dan"
Danford, Jr.) acquires more than 40% of the Company's Common Stock as a
result of this Offering, the Company will have the right to reject any
subscription if, in the Company's judgment, such purchase will violate the
provisions of the Development Agreement, as amended.
AGREEMENT WITH SELECT INVESTOR RELATIONS CORPORATION
In January 1998, the Company entered into a Consulting Agreement
("Consulting Agreement") with Select Investor Relations Corporation under
which Select agreed to provide a variety of consulting services to the
Company, including assisting the Company in developing a business plan,
providing public relations activities for the Company, increasing the
Company's visibility in the marketplace and assisting the Company in locating
sources of debt and equity financing. Select is not, however, acting as a
broker-dealer and will not effect any transactions for the Company. Under
the terms of the Consulting Agreement, the Company agreed to pay Select an
initial fee of $29,500, plus monthly fees of $26,042 for a period of one
year. The Company has also agreed, however, that upon its achieving of the
minimum and maximum proceeds from this Offering, it will prepay certain of
the amounts due under the Consulting Agreement. The Company has also agreed
to issue a warrant to Select to purchase 24,759 shares of the Company's
Common Stock. Of the shares subject to the warrant, 8,253 shares are
exercisable at a price of $.001 per share, 8,253 shares are exercisable at a
price of $1.25 a share for a
29
<PAGE>
period of 12 months from the date of the Consulting Agreement and 8,253
shares are exercisable at a price of $1.625 a share for a period of 15 months
from the date of the Consulting Agreement.
LEGAL MATTERS
The validity of the shares of Common Stock contained in the Units being
offered hereby will be passed upon by Lindquist & Vennum P.L.L.P., 4200 IDS
Center, Minneapolis, Minnesota 55402.
EXPERTS
The Company's consolidated financial statements as of June 29, 1997 and
for the fifty-two weeks ended June 29, 1997 and June 30, 1996, incorporated
by reference into this Prospectus, have been so incorporated in reliance upon
the report of Grant Thornton LLP, independent certified public accountants,
given on the authority of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
Neither Bruegger's Franchise Corporation ("Bruegger's") nor any of its
parents, subsidiaries, affiliates, officers, directors, agents, employees,
accountants or attorneys are in any way participating in, approving or
endorsing this Offering of securities by the Company, any of the offering or
accounting procedures used in the Prospectus, or any representations made in
connection with the Offering. The grant by Bruegger's of any franchise or
other rights to Premium Restaurant Company or DFW is not intended as, and
should not be interpreted as, an express or implied approval, endorsement or
adoption of any statement regarding financial or other performance which may
be contained in this Prospectus. Any review by Bruegger's of this Prospectus
or the information included in this Prospectus has been conducted solely for
the benefit of Bruegger's to determine conformance with Bruegger's internal
policies, and not to benefit or protect any other person. No investor should
interpret any such review by Bruegger's or the use and display of any of
Bruegger's logos, trademarks or service marks herein as approval,
endorsement, acceptance or adoption of any representation, warranty or
covenant contained in the materials reviewed. The enforcement or waiver of
any obligation of Premium Restaurant Company or DFW under any agreement
between Premium Restaurant Company or DFW and Bruegger's or any of Bruegger's
affiliates is a matter of Bruegger's or its affiliates' sole discretion. No
investor should rely on any representation, assumption or belief that
Bruegger's or its affiliates will enforce or waive particular obligations of
Premium Restaurant Company or DFW under such agreements.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Reports,
proxy and information statements and other information filed by the Company
can be inspected and copied at the public facilities maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and
the Commission's regional offices located at Seven World Trade Center, 13th
Floor, New York, New York 10048, and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be
obtained at prescribed rates from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission
also maintains a Web site (http://www.sec.gov) at which reports, proxy and
information statements and other information regarding the Company may be
accessed. Such reports, proxy statements and other information can also be
inspected at the offices of the National Association of Securities Dealers,
Inc., 1735 K Street N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on
Form S-2 under the Securities Act of 1933, as amended, with respect to the
Units offered hereby. This Prospectus does not contain all information set
forth in such Registration Statement and the exhibits and schedules thereto,
as permitted by the rules and regulations of the Commission. In each
instance, reference is made to the copy of such contract or document (if any)
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. For further information with
respect to the Company and the shares offered hereby, reference is made to
such Registration Statement, including the
30
<PAGE>
exhibits and financial schedules filed as part thereof. Such information may
be inspected in the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549. Copies thereof may be obtained from
the Commission at prescribed prices.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents which have been filed by the Company with the
Commission (File No. 0-16348), are incorporated by reference in this
Prospectus (i) the Company's Annual Report on Form 10-KSB for the fifty-two
weeks ended June 29, 1997 and (ii) the Company's Quarterly Reports on Form
10-QSB for the quarters ended September 28, 1997 and December 28, 1997. The
Company's Annual Report for the fifty-two weeks ended June 29, 1997 and the
Form 10-QSB for the quarter ended December 28, 1997 are being delivered to
investors concurrently with this Prospectus.
The foregoing documents contain financial and other information
concerning the Company. Such documents constitute a part of this Prospectus,
and the information contained therein should be reviewed together with all
other information contained herein. Any statement contained in a document
incorporated by reference herein shall be deemed to be modified or superseded
hereby to the extent that a statement contained herein modifies or supersedes
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus has been delivered, upon the written or oral request of such
person, a copy of any or all of the documents which are incorporated by
reference into this Prospectus, other than exhibits to such documents (unless
such exhibits are specifically incorporated by reference in such documents).
Requests for such copies should be directed to Scott P. McGuire, Premium
Restaurant Company, 5555 West 78th Street, Edina, Minnesota 55439-2702.
Telephone requests may be directed to (612) 941-0108, extension 205.
31
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS OR A PROSPECTUS SUPPLEMENT, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY. THE DELIVERY OF THIS PROSPECTUS OF
A PROSPECTUS SUPPLEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE UNITS OFFERED
HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY OF THE UNITS OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS OR A PROSPECTUS SUPPLEMENT NOR ANY SALE MADE
THEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN OR THEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT
TO THE DATE HEREOF.
_________________________________
TABLE OF CONTENTS
_________________________________
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................................................. 3
Risk Factors........................................................ 5
Use of Proceeds..................................................... 9
Price Range of Common Stock and Dividend Policy..................... 10
Selected Consolidated Financial Data................................ 11
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 12
Business............................................................ 19
Certain Transactions................................................ 26
Description of Securities and Terms of Offering..................... 26
Legal Matters....................................................... 29
Experts............................................................. 29
Additional Information.............................................. 29
Available Information............................................... 29
Incorporation of Certain Documents by Reference..................... 30
</TABLE>
___________________________
PREMIUM RESTAURANT COMPANY
___________________________
PROSPECTUS
________, 1998
__________________________
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14: OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee $ 2,118
Legal fees 15,000
Accounting fees 10,000
Transfer Agent expenses 2,500
Printing expenses 3,000
Blue Sky fees 1,000
Miscellaneous fees and expenses 1,382
-------
Total $35,000
-------
-------
</TABLE>
ITEM 15: INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Bylaws require indemnification of its directors and
officers to the fullest extent permitted by Minnesota law. The Bylaws
provide that the Company shall indemnify any person made or threatened to be
made a party to any threatened, pending or completed civil, criminal
administrative, arbitration or investigative proceeding, including a
proceeding by or in the right of the corporation, by reason of the former or
present official capacity of the person, provided the person seeking
indemnification meets five criteria set forth in Section 302A.521 of the
Minnesota Business Corporation Act.
The Company's Bylaws also authorize the Board of Directors, to the
extent permitted by applicable law, to indemnify any person or entity not
described in the Bylaws pursuant to, and to the extent described in, an
agreement between the Company and such person, or as otherwise determined by
the Board of Directors in its discretion.
Section 302A.521 of the Minnesota Business Corporation Act provides that
a corporation shall indemnify any person who was or is made or is threatened
to be made a party to any proceeding by reason of the former or present
official capacity of such person against judgments, penalties, fines,
including, without limitation, excise taxes assessed against such person with
respect to an employee benefit plan, settlements, and reasonable expenses,
including attorneys' fees and disbursements, incurred by such person in
connection with the proceeding if, with respect to the acts or omissions of
such person complained of in the proceeding, such person (i) has not been
indemnified by another organization or employee benefit plan for the same
expenses with respect to the same acts or omissions; (ii) acted in good
faith; (iii) received no improper personal benefit and Section 302A.255
(regarding conflicts of interest), if applicable, has been satisfied; (iv) in
the case of a criminal proceeding, had no reasonable cause to believe the
conduct was unlawful; and (v) in the case of acts or omissions by person in
their official capacity for the corporation, reasonably believed that the
conduct was in the best interests of the corporation, or in the case of acts
or omissions by persons in their capacity for other organizations, reasonably
believed that the conduct was not opposed to the best interests of the
corporation.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- --------------------------
<S> <C>
4.1* Form of Warrant Agreement
4.2* Form of Warrant Certificate
5.1 Opinion of Lindquist & Vennum P.L.L.P., counsel to the Company
23.1 Consent of Grant Thornton LLP
23.2 Consent of Lindquist & Vennum P.L.L.P. (see Exhibit 5.1 above)
24.1 Powers of Attorney (included on signature page hereof)
</TABLE>
______________________________________
* Previously filed
II-1
<PAGE>
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
Prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective Registration
Statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the Registration Statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the Registrant pursuant to Section 13
or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated
by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the Units offered herein, and the
offering of such Units at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the Units being registered which remain unsold at the expiration of
the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the Registrant's Annual Report pursuant to Section 13(a) or Section 15(d) of
the Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the Notes offered therein, and the offering of such Notes at that
time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(d) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
II-2
<PAGE>
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of Prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment 1 to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Edina,
State of Minnesota, on the 20th day of February 1998.
PREMIUM RESTAURANT COMPANY
(Registrant)
By /s/ Phillip R. Danford
---------------------------------
Phillip R. Danford
President and Director
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on in the
capacities indicated on February 20, 1998.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ L.E. "Dan" Danford, Jr.* Director and Chairman of the Board
- -------------------------------
L.E. "Dan" Danford, Jr.
/s/ Phillip R. Danford President and Director
- ------------------------------- (Principal Executive Officer; Principal
Phillip R. Danford Financial Officer)
/s/ Thomas A. Kelm* Director
- -------------------------------
Thomas A. Kelm
/s/ Scott P. McGuire* Controller
- -------------------------------
*By /s/ Phillip R. Danford
- -------------------------------
Attorney in Fact
</TABLE>
II-4
<PAGE>
EXHIBIT 5.1
THOMAS G. LOVETT IV
(612) 371-3270
[email protected]
February 20, 1998
Premium Restaurant Company
5555 West 78th Street
Edina, Minnesota 55439-2702
Re: 1997 Public Unit Offering
-------------------------
Ladies and Gentlemen:
As counsel to Premium Restaurant Company (the "Company"), you have
requested our opinion in connection with the Company's issuance of up to
2,000,000 Units (the "Units"), each Unit consisting of one share of the
Company's common stock, $.01 par value per share (the "Common Stock"), and
one Redeemable Common Stock Purchase Warrant ("Warrant") to acquire an
additional share of Common Stock, that will be issued in connection with the
Company's public offering (the "Offering") pursuant to Form S-2 Registration
No. 333-33187 (the "Registration Statement"), under the Securities Act of
1933, as amended; and up to 2,000,000 shares of Common Stock issuable upon
exercise of the Warrants.
We have reviewed the Restated Articles of Incorporation and Bylaws of
the Company, as well as resolutions adopted by its Board of Directors
authorizing the issuance and sale of the Units. In addition, we have
examined such documents and undertaken such further inquiry as we consider
necessary for rendering the opinion set forth below.
Based upon the foregoing, it is our opinion that:
1. The Company has been duly incorporated and is validly
existing and in good standing under the laws of the State of
Minnesota;
2. The Units and Common Stock included in the Units has been
duly authorized by the Company, and the shares of Common
Stock included in the Units when issued upon payment
therefor will be validly issued, fully paid and
nonassessable;
3. The Common Stock issuable upon exercise of the Warrants
will, assuming payment in accordance with the Warrant terms,
will be validly issued, fully paid and nonassessable.
Very truly yours,
LINDQUIST & VENNUM P.L.L.P.
/s/ Lindquist & Vennum P.L.L.P.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated August 18, 1997 accompanying the consolidated
financial statements of Premium Restaurant Company (formerly Ciatti's, Inc.)
included in the Annual Report on Form 10-KSB as of June 29, 1997 and for the
fifty-two weeks ended June 19, 1997 and June 30, 1996 which is incorporated
by reference in the Registration Statement and Prospectus. We consent to the
incorporation by reference in the Registration Statement and Prospectus of
our report and to the use of our name as it appears under the caption
"Experts."
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota
February 20, 1998
